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Disclosure Modernization and Simplification In-Depth On March 20, 2019, the SEC adopted a final rule for “Disclosure Modernization and Simplification” as part of its responsibilities under the FAST Act. This new rule makes a number of detailed changes to reports on Form 10-K, 10-Q and, to a lesser extent, Form 8-K. The rule also makes several broad changes in areas such as incorporation by reference, obtaining confidential treatment and iXBRL tagging. The Final Rule was published in the Federal Register on April 2, 2019. Most of the changes in the Final Rule were effective 30 days later, that is for filings made on or after May 2, 2019. The rules’ changes for confidential treatment were effective for filings made after the date the rule was published in the Federal Register, April 2, 2019. The changes for tagging cover page information with inline XBRL become effective at the same time the inline XBRL requirement becomes effective for a company. This transition is discussed in more detail in the next section.

This first section of this document provides a “big-picture” summary of what has been “modernized and simplified” item-by-item in Forms 10-K, 10-Q, 8-K and selected foreign private issuer forms. Each subsequent section reviews the details of each change. The changes made in periodic and current reports are: 1. Cover page changes

Both 10-Q and 10-K now include ticker symbol on the cover page. Elimination of the S-K 405 Section 16 delinquency reporting check box. Both 10-Q and 10-K cover pages must now be tagged for iXBRL (effective with the iXBRL rule).

2. Item 1A – Risk Factors

Risk factor guidance has been moved from S-K Item 503(c) to new Item 105. The wording has been changed to remove examples.

3. Item 2 – Properties S-K Item 102 has been changed to focus on material information about properties. 4. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of

Operations Regulation S-K Item 303 has been changed to allow companies that present three years of financial statements to omit the earliest year in MD&A discussion.

5. Items 10 and 11. Directors, Executive Officers, Corporate Governance and Executive

Compensation

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One minor change in S-K Item 401 to fix the instruction that permits omitting executive officer information from the proxy or other information statement if it is included in Part One of Form 10-K, and another change to the title of this section if it is included in Form 10-K. Another minor change to S-K Item 405 to change the title of the section for delinquent Section 16 filers to “Delinquent Section 16(a) Reports” and encourage omitting this title if there are no delinquencies to report.

No significant changes to executive compensation disclosures. There is one minor change to S-K Item 407(d) that may affect proxy disclosures, including some EGC disclosures.

6. Item 15. Exhibits, Financial Statement Schedules.

Changes for incorporation by reference, redacting of immaterial information with potential competitive harm, potential exclusion of schedules for exhibits, omission of information that would violate personal privacy considerations and other changes such as moving disclosures such as a description of the registrant’s securities to an exhibit.

The last section of this document also includes discussion of other relevant reporting changes, including:

Streamlining of the confidential treatment process. The elimination of the 5-year time horizon for incorporation by reference from 34 Act reports that used to be in S-K Item 10(d). Changes to Rule 12b-23 dealing with incorporation by reference to clarify that incorporation by reference into the financial statements is generally not allowed.

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Disclosure Modification and Simplification: Topic #1 – Cover Page Changes The three changes to Forms 10-K, 10-Q and 8-K cover pages are:

1. The cover pages of Forms 10-K, 10-Q and 8-K now include the filer’s ticker symbol, and the cover pages of all the forms will have consistent information about the national exchange or principal U.S. market for the company’s securities and title of each class of securities.

2. Cover pages for Forms 10-K, 10-Q and 8-K must now be tagged with inline XBRL.

3. On Form 10-K’s cover page the S-K 405 Section 16 delinquency reporting checkbox is removed, along with a related instruction in Item 10 of form 10-K.

(Note: Parts of this rule also apply to Forms 20-F and 40-F, which are included in the discussion below.)

1. Consistent Disclosure of Ticker Symbol, Exchange and Class of Securities on Cover Pages

This change seems fairly innocuous, and in fact it really is. The addition of a company’s ticker symbol to the cover pages of Forms 10-K, 10-Q and 8-K (as well as Forms 20-F and 40-F) is not discussed in any detail in the final rule. As a matter of common sense in a world with so many on-line sources for stock price information this is essentially a nice convenience. This change follows consistently with last August’s final rule that requires disclosure of a company’s ticker symbol in Form 10-K Item 5.

The other part of this disclosure does not change Form 10-K where information about the exchange or principal U.S. market for the company’s securities and the title of each class of securities is already included. The new rule adds this information to the cover pages of Forms 10-Q and 8-K (as well as Forms 20-F and 40-F). Adding this information provides for consistency, particularly when all of this information will be tagged with iXBRL tags. This change should make gathering data electronically simpler and help assure consistency in how data is gathered.

To make both the above changes the final rule adds this box to Forms 10-K, 10-Q, 8-K, 20-F and 40-F:

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The SEC has updated the versions of the cover pages in the instructions to the forms, which can be found here.

2. Inline XBRL Tagging on Cover Pages for Forms 10-K, 10-Q and 8-K.

The SEC’s Inline XBRL (iXBRL) rule adopted on June 28, 2018, requires companies to implement inline XBRL on the following schedule:

If you have not seen a live iXBRL filing, you could check out this example, where you can also try the SEC’s inline XBRL viewer. You can also check out Dell Technologies and Adobe for more examples.

Existing requirements in Reg S-T and the EDGAR Filer Manual include tagging of certain information on the cover pages of Form 10-K and 10-Q, known as document and entity identifier elements. This existing tagging requirement includes form type, company name, filer size, and public float. This is of course only part of the information on the cover pages of these forms.

The Disclosure Modernization and Simplification final rule expands this requirement to include more information and applies it to more forms. The new rule requires all of the information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F, and 40-F to be tagged in Inline XBRL. This will be done following the guidance in the EDGAR Filing Manual.

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Tagged information will now include the exchange on which the company’s securities are registered and the state (or jurisdiction) of incorporation.

The tagging will be done following the requirements in the EDGAR Filer Manual and is added via new Regulation S-T Rule 406 and a new exhibit, Item 601(b)(104) to Regulation S-K. (The rule also adds new section 104 to the “Instructions as to Exhibits” of Form 20-F, and new paragraph B.17 to the “General Instructions” of Form 40-F to add this requirement to those forms also.)

New S-T Item 406 now provides this requirement:

232.406 Cover Page XBRL Data Tagging.

Electronic filers submitting Forms 10-K (§ 249.310 of this chapter), 10-Q (§ 249.308a of this chapter), 8-K (§ 249.308 of this chapter), 20-F (§ 249.220f of this chapter) or 40-F (§ 249.240f of this chapter) who are required to submit Interactive Data Files (§ 232.11) in Inline XBRL format in accordance with this Regulation S-T must tag in Inline XBRL electronic format, in the manner provided by the EDGAR Filer Manual, all of the information provided by the electronic filer that is required on the cover page of these forms.

In the final rule as a rational for this change the SEC says:

By increasing the capacity for automation of the data gathering process, we believe these amendments will further enhance investors’ use of interactive data to identify, count, sort, compare, and analyze registrants and their disclosures. For example, an investor will be able to more readily and accurately identify registrants that are listed on a specific exchange and that identified themselves as well known seasoned issuers in their last annual report. Similarly, the Inline XBRL tagging of the new ticker symbol disclosure requirement will make it easier to relate/link a specific security to the underlying registrant. In addition, the amendments will allow the Commission to make enhancements to the EDGAR system to enable investors to search for filings with these specific criteria.

And, these changes will also benefit the Commission staff:

The new filing requirements will also be of benefit to the Commission, as the Commission and its staff will be able to more readily sort and analyze filings to, among other things, improve data and analysis for rulemaking initiatives.

As a last note, this change will be effective for a company at the same time the Inline XBRL requirement becomes effective for that company, as outlined in the table at the beginning of this section.

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3. Elimination of the Form 10-K S-K Item 405 Checkbox

This last cover page change applies only to Form 10-K. In our workshops we have always cautioned participants to be very careful with the complexly worded S-K Item 405 checkbox related to disclosure of delinquent Section 16 filers. While there was a separate instruction about this checkbox in the Item 10 instructions, it was not clear that the box should be checked if all reports were filed on time, and the box was frequently incorrect.

Given all the other reporting surrounding delinquent Section 16 filings and the disclosure of this information in proxy statements and Form 10-K, page 219 of the rule contains the change to Form 10-K for this checkbox:

Removing the second sentence of Instruction (G)(4) under “General Instructions”, the checkbox that relates to disclosure under Item 405, and the instruction to Item 10

The first part of this change referring to Instruction (G)(4) is a “clean-up” change related to incorporation by reference and will be discussed in a later section. The second section – “the checkbox that relates to disclosure under Item 405, and the instruction to Item 10” – is the regulatory guidance that removes the troublesome checkbox. This language is now gone from the cover page:

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

And, this instruction has also been removed from Item 10:

Instruction

Checking the box provided on the cover page of this Form to indicate that Item 405 disclosure of delinquent Form 3, 4, or 5 filers is not contained herein is intended to facilitate Form processing and review. Failure to provide such indication will not create liability for violation of the federal securities laws. The space should be checked only if there is no disclosure in this Form of reporting person delinquencies in response to Item 405 and the registrant, at the time of filing the Form 10-K, has reviewed the information necessary to ascertain, and has determined that, Item 405 disclosure is not expected to be contained in Part III of the Form 10-K or incorporated by reference.

While the final rule does not include a lot of discussion about this change, this is a welcome simplification!

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See below for a detailed discussion of the changes to the required disclosures about delinquent Section 16(a) reports.

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Disclosure Modernization and Simplification: Topic#2 – Risk Factors Risk factor disclosure frequently presents a conundrum in public reporting. The SEC’s risk factor disclosure requirements focus on what makes an investment in a company’s securities “risky or speculative”. Buy many companies present so many risk factors that questions arise about their relevance to investors. This is one among a number of reasons the SEC included this disclosure in their Disclosure Modernization and Simplification rule. To begin reviewing the changes in risk factor disclosures, Item 1A in Form 10-K previously read:

Item 1A. Risk Factors.

Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 503(c) of Regulation S-K (§229.503(c) of this chapter) applicable to the registrant. Provide any discussion of risk factors in plain English in accordance with Rule 421(d) of the Securities Act of 1933 (§230.421(d) of this chapter). Smaller reporting companies are not required to provide the information required by this item.

Item 1A has been changed to now read:

Item 1A. Risk Factors.

Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 105 of Regulation S-K (§ 229.105 of this chapter) applicable to the registrant.

The specific disclosure requirements surrounding risk factors have been moved to S-K Item 105 and out of Item 503. Since most of the disclosures in Part 500 of S-K deal with prospectus disclosures and risk factors are, since 2005, a regular ‘34 Act report disclosure requirement, this change makes sense. In addition, as you will see below, the removal of the plain English language that was in the Item 1A instructions is not really a change as the requirement is now incorporated in new S-K Item 105. The old text of Item 503(c), which has been removed, read:

(c) Risk factors. Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. The risk factor discussion must immediately follow the summary section. If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately

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follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on §230.430A(a) of this chapter. The risk factors may include, among other things, the following:

(1) Your lack of an operating history; (2) Your lack of profitable operations in recent periods; (3) Your financial position; (4) Your business or proposed business; or (5) The lack of a market for your common equity securities or securities convertible into or exercisable for common equity securities.

The new requirement in S-K Item 105 now reads:

229.105 (Item 105) Risk factors.

Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply generically to any registrant or any offering. Explain how the risk affects the registrant or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. If the risk factor discussion is included in a registration statement, it must immediately follow the summary section. If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on Rule 430A (§ 230.430A(a) of this chapter). The registrant must furnish this information in plain English. See § 230.421(d) of Regulation C of this chapter.

New S-K Item 105 has some subtle wording changes which are highlighted above. The addition of the phrase “an investment in the registrant” makes the application of this disclosure clearer for ‘34 Act periodic reports. And, the addition of the phrase “apply generically” helps clarify that the requirement should not be interpreted too broadly.

Also, the removal of the examples makes it clear that this is intended to be a registrant specific, principles-based requirement. In the Final Rule Release the SEC included these comments:

The Commission also proposed amendments that would eliminate the specific risk factor examples that are currently enumerated in Item 503(c). Although Item 503(c) is principles based, and the Commission has eschewed “boiler plate” risk factors that are not tailored to the unique circumstances of each registrant, the …. examples of factors that may make an offering speculative or risky have remained unchanged since the Commission first published guidance on risk factor disclosure in 1964.

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As discussed in the Proposing Release, the Commission’s principles-based approach to risk factor disclosure is not consonant with the item’s list of examples of material risks. These examples may not apply to all registrants and may not correspond to the material risks of any particular registrant. In addition, the inclusion of these examples could suggest that a registrant must address each one in its risk factor disclosures, regardless of the significance to its business. Finally, the Commission was concerned that the inclusion of any examples in Item 503(c), whether to illustrate the specific kinds of risks that should be disclosed or generic risks that should be avoided, could anchor or skew the registrant’s risk analysis in the direction of the examples.

It will be interesting to watch and see how or if companies take advantage of this new requirement.

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Disclosure Modernization and Simplification: Topic #3 – Properties Disclosures Form 10-K requires property related disclosures in Regulation S-K Item 102. The old text Item 102 is:

229.102 (Item 102) Description of property.

State briefly the location and general character of the principal plants, mines and other materially important physical properties of the registrant and its subsidiaries. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to any major encumbrance, so state and describe briefly how held.

Instructions to Item 102: 1. What is required is such information as reasonably will inform investors as to the suitability, adequacy, productive capacity and extent of utilization of the facilities by the registrant. Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.

2. In determining whether properties should be described, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§229.101).

The new text effective May 2, 2019 is:

229.102 (Item 102) Description of property.

To the extent material, disclose the location and general character of the registrant’s principal physical properties. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to an encumbrance that is material to the registrant, so state and describe briefly how held.

Instruction 1 to Item 102: This item requires information that will reasonably inform investors as to the suitability, adequacy, productive capacity, and extent of utilization of the principal physical properties of the registrant and its subsidiaries, to the extent the described properties are material. A registrant should engage in a comprehensive consideration of the materiality of its properties. If appropriate, descriptions may be provided on a collective basis; detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.

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Instruction 2 to Item 102: In determining materiality under this Item, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§ 229.101).

The changes to this item focus on one of the more complex judgments we make in SEC reporting, materiality. The old item started:

“State briefly the location and general character of the principal plants, mines and other materially important physical properties…”

This has been changed to:

“To the extent material, disclose the location and general character of the registrant’s principal physical properties.”

The change in wording from “materially important physical properties” to “To the extent material, disclose…” tells us that we don’t need to include information that, in the words of CorpFin Director Hinman, does not provide investors:

“material information they need about companies and their securities offerings to make informed investment and voting decisions”

While the information about segments and suitability, adequacy, productive capacity and extent of utilization reads very similarly from the old to the new requirement, the words “to the extent the described properties are material” makes clear we can make materiality calls and not be concerned with the other potential considerations in the old language. We can hopefully no longer by rote disclose information about our properties that will not matter to investors. Additionally, the new instruction “A registrant should engage in a comprehensive consideration of the materiality of its properties” more or less makes this a requirement. In the final rule release, the SEC made this observation:

Despite existing language in Item 102 that limits the required information to properties that are “materially important” to the registrant and its subsidiaries, the disclosure elicited in response to this item may not have been consistently material. For many companies, the only physical properties held may be their headquarters, office space, or ancillary facilities, a description of which is likely to be unimportant to an investor’s evaluation of an investment in the company.

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As an example, if a service company uses only simple office space and is in an area where an adequate supply of suitable space is available and the company has no excess space problems, it could be appropriate to make no disclosures about properties. This would reduce the clutter of immaterial information in Form 10-K. The last part of instruction 1 makes a suggestion to avoid immaterial details:

“If appropriate, descriptions may be provided on a collective basis”

Materiality Considerations The last instruction, which is the same on both the old and new versions of S-K Item 102, makes it clear that the definition of materiality is not just the magnitude of an item.

Instruction 2 to Item 102: In determining materiality under this Item, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§ 229.101).

Instruction 1 to Item 101 does not actually refer to SAB 99. It does include an example that perhaps is similar to considerations in SAB 99

Instructions to Item 101: 1. In determining what information about the segments is material to an understanding of the registrant's business taken as a whole and therefore required to be disclosed, pursuant to paragraph (c) of this Item, the registrant should take into account both quantitative and qualitative factors such as the significance of the matter to the registrant (e.g., whether a matter with a relatively minor impact on the registrant's business is represented by management to be important to its future profitability), the pervasiveness of the matter (e.g., whether it affects or may affect numerous items in the segment information), and the impact of the matter (e.g., whether it distorts the trends reflected in the segment information). Situations may arise when information should be disclosed about a segment, although the information in quantitative terms may not appear significant to the registrant's business taken as a whole.

While this change does present some new materiality judgments for properties, it does hopefully modernize and simplify these disclosures. And, to provide a starting point, here are two examples from 3M Corporation and General Motors, which are wonderfully brief even though prepared under the old disclosure requirements:

3M Corporation - Item 2. Properties.

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In the U.S., 3M’s general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125 manufacturing and converting facilities in 37 countries.

3M owns the majority of its physical properties. 3M’s physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

General Motors - Item 2. Properties

At December 31, 2018 we had over 100 locations in the U.S. (excluding our automotive financing operations and dealerships) which are primarily for manufacturing, assembly, distribution, warehousing, engineering and testing. We, our subsidiaries or associated companies in which we own an equity interest own most of these properties and/or lease a portion of these properties. Leased properties are primarily composed of warehouses and administration, engineering and sales offices.

We have manufacturing, assembly, distribution, office or warehousing operations in 33 countries, including equity interests in associated companies which perform manufacturing, assembly or distribution operations. The major facilities outside the U.S., which are principally vehicle manufacturing and assembly operations, are located in Argentina, Brazil, Canada, China, Colombia, Ecuador, Mexico, South Korea and Thailand.

In November 2018 we announced our plans to realign our manufacturing capacity in response to market-related volume declines in passenger cars.

GM Financial owns or leases facilities for administration and regional credit centers. GM Financial has 39 facilities, of which 26 are located in the U.S. The major facilities outside the U.S. are located in Brazil, Canada, China and Mexico.

One final note - the specific requirements in industries such as mining and oil and gas are not changed by this new rule.

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Disclosure Modernization and Simplification: Topic #4 – MD&A When reading the results of operations section in MD&A it is not unusual to experience a feeling of déjà vu. When comparing the current year to last year companies will explain why financial statement line items changed with the goal of helping readers understand quality of earnings and the likelihood that past performance predicts future performance. (For a quick review of these objectives you could re-read the SEC’s 2003 MD&A release, FR 72.) Unfortunately, when companies write the next part of this discussion and compare last year to the third year back, they frequently follow a sort of literal interpretation of the S-K Item 303 guidance and end up repeating this discussion but with the prior year numbers. It is difficult to argue that this repetition does much to add to an investor’s understanding of earnings quality and predictability, and in fact this information is already available in prior year filings. This was the issue that the SEC addressed in their March 20, 2019 Disclosure Modernization and Simplification rule in the one MD&A area they changed - S-K Item 303(a) instruction 1. Here is the new language in this instruction, with changes bolded:

Instructions to paragraph 303(a): 1. The registrant’s discussion and analysis shall be of the financial statements and other statistical data that the registrant believes will enhance a reader’s understanding of its financial condition, changes in financial condition, and results of operations. Generally, the discussion shall cover the periods covered by the financial statements included in the filing and the registrant may use any presentation that in the registrant’s judgment enhances a reader’s understanding. A smaller reporting company’s discussion shall cover the two-year period required in Article 8 of Regulation S-X and may use any presentation that in the registrant’s judgment enhances a reader’s understanding. For registrants providing financial statements covering three years in a filing, discussion about the earliest of the three years may be omitted if such discussion was already included in the registrant’s prior filings on EDGAR that required disclosure in compliance with Item 303 of Regulation S-K, provided that registrants electing not to include a discussion of the earliest year must include a statement that identifies the location in the prior filing where the omitted discussion may be found. An emerging growth company, as defined in Rule 405 of the Securities Act (§ 230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§ 240.12b-2 of this chapter), may provide the discussion required in paragraph (a) of this Item for its two most recent fiscal years if, pursuant to Section 7(a) of the Securities Act of 1933 (15 U.S.C 77g(a)), it provides audited financial statements for two years in a Securities Act registration statement for the initial public offering of the emerging growth company’s common equity securities.

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This instruction used to read:

Instructions to paragraph 303(a): 1. The registrant's discussion and analysis shall be of the financial statements and other statistical data that the registrant believes will enhance a reader's understanding of its financial condition, changes in financial condition and results of operations. Generally, the discussion shall cover the three-year period covered by the financial statements and shall use year-to-year comparisons or any other formats that in the registrant's judgment enhance a reader's understanding. However, where trend information is relevant, reference to the five-year selected financial data appearing pursuant to Item 301 of Regulation S-K (§229.301) may be necessary. A smaller reporting company's discussion shall cover the two-year period required in Article 8 of Regulation S-X and shall use year-to-year comparisons or any other formats that in the registrant's judgment enhance a reader's understanding. An emerging growth company, as defined in Rule 405 of the Securities Act (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter), may provide the discussion required in paragraph (a) of this Item for its two most recent fiscal years if, pursuant to Section 7(a) of the Securities Act of 1933 (15 U.S.C 77g(a)), it provides audited financial statements for two years in a Securities Act registration statement for the initial public offering of the emerging growth company's common equity securities.

As you can see in the highlighted sections above, the key changes from the old instruction to the new instruction are:

1. Removing the language referring to “year-to-year” comparisons and replacing it with “registrants may use any presentation that in the registrant’s judgment enhances a reader’s understanding”. 2. Removing the reference to the five-year summary. 3. Allowing registrants who provide financial statements covering three years in a filing to omit discussion of the earliest of the three years if such discussion is already included in any other of the registrant’s prior filings on EDGAR. While the proposal had some limitations on this provision, companies can make this election with no limitations, but they must identify the location in the prior filing where the omitted discussion may be found.

As a point of interest, it is worth noting that the prior year MD&A does not have to be in a Form 10-K and in fact could be in any prior SEC filing.

Consistently with the other changes we have discussed so far and in alignment with CorpFin Director Hinman’s March 15, 2019 speech we reviewed in this blog post, these new requirements are not bright-line standards. They are based on principles consistent with

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providing investors information they need to make investment and voting decisions and call on us to exercise judgment.

In the final rule release the SEC made these comments:

We believe the revisions to Item 303 that we are adopting give registrants the flexibility to tailor their presentation in MD&A in a manner that is most suitable for their varying circumstances, while at the same time continuing to require that they provide all of the information necessary to an understanding of their financial condition, changes in financial condition and results of operations. In that respect, we view the elimination of references to year-to-year comparisons and the new language in Instruction 1 of Item 303 allowing registrants to omit discussion of the earliest of the three years covered by the financial statements as complementary.

These amendments emphasize the flexibility available to registrants with respect to the form of MD&A presentation. The major benefit of flexibility is that it allows registrants to frame the information in a way that emphasizes material information and allows registrants to omit information that is not material. One potential cost associated with this aspect of the amendment is that, to the extent the amendments lead to disclosure that varies more across firms and across a single firm’s filings, they also may make disclosure less comparable across registrants and over time.

The combined effects of these amendments will be to eliminate the burden on registrants to prepare and provide repetitive disclosure that is not material. The amendments are of particular significance because MD&A is typically one of the most labor-intensive sections of any form in which it is required. We anticipate that the amendments to simplify and clarify the MD&A requirements will reduce the paperwork burden associated with affected forms.

It will be interesting to see how companies use these new rules.

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Disclosure Modernization and Simplification: Topic #5 – Sundry 10-K Part III and Proxy Changes This section reviews changes to areas that are included in Part III of Form 10-K and in proxy statement disclosures about executive officers and delinquent Section 16 filers.

Executive Officer Disclosures

A question that frequently arises in our workshops is “Why do companies sometimes include a list of executive officers at the end of Part I of their Form 10-K?” Answering this question starts with S-K Item 401, which requires disclosure of a wealth of information about both executive officers and directors. These disclosures are required in Part III of Form 10-K and in the proxy statement disclosures in Schedule 14A:

Item 7. Directors and executive officers. If action is to be taken with respect to the election of directors, furnish the following information in tabular form to the extent practicable. If, however, the solicitation is made on behalf of persons other than the registrant, the information required need be furnished only as to nominees of the persons making the solicitation.

(a) The information required by instruction 4 to Item 103 of Regulation S-K (§229.103 of this chapter) with respect to directors and executive officers.

(b) The information required by Items 401, 404(a) and (b), 405 and 407 of Regulation S-K (§§229.401, 229.404(a) and (b), 229.405 and 229.407 of this chapter), other than the information required by:

The proxy, however, is essentially about the election of directors and by including the information about executive officers with the information about directors could create confusion for shareholders in the voting process.

To mechanically deal with this potential problem many years ago the SEC added this instruction to S-K 401:

Instructions to paragraph (b) of Item 401:

3. The information regarding executive officers called for by this Item need not be furnished in proxy or information statements prepared in accordance with Schedule 14A under the Exchange Act (§240.14a-101 of this chapter) by registrants relying on General Instruction G of Form 10-K under the Exchange Act (§249.310 of this chapter); Provided, that such information is furnished in a separate item captioned “Executive officers of the registrant” and included in Part I of the registrant’s annual report on Form 10-K.

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The Disclosure Modernization and Simplification final rule addressed two issues surrounding this instruction:

1. The instruction was part of paragraph “(b) Identification of executive officers”, so it was not clear whether or not the instruction applied to all the S-K Item 401 disclosures about executive officers, and

2. The title for the disclosure, “Executive officers of the registrant” read in a formal kind of compliance language and is not particularly focused on communication.

To address these issues the SEC made two changes in their final rule. The SEC:

1. Moved the instruction so that it now is clear it applies to all the S-K Item 401 disclosures, and

2. Reworded the title so that it now has a more “plain English” communication focus.

The now moved and reworded instruction reads:

Instruction to Item 401. The information regarding executive officers called for by this Item need not be furnished in proxy or information statements prepared in accordance with Schedule 14A or Schedule 14C under the Exchange Act (§240.14a-101 and §240.14c-101 of this chapter) if you are relying on General Instruction G of Form 10-K under the Exchange Act (§249.310 of this chapter), such information is furnished in a separate section captioned “Information about our Executive Officers,” and is included in Part I of your annual report on Form 10-K.

Section 16 Delinquent Filer Disclosures

As a brief review, Section 16 of the 1934 Act requires directors, executive officers and owners of over 10% of a registrant’s stock to provide filings on Forms 3, 4 and 5 about stock ownership and transactions. This is important information as investors have a high level of interest in insider stock transactions.

Because there are so many Section 16 filers it would be tactically difficult for the SEC to assure that all Section 16 reports were timely filed. To deal with this situation, S-K Item 405 requires companies to disclose information about delinquent Section 16 filers in their proxy statement or Form 10-K if they do not file a proxy.

In the Disclosure Modernization and Simplification final rule the SEC dealt with three aspects of this disclosure:

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1. Eliminated a very confusing S-K 405 check-box from the cover page of Form 10-K. This change is reviewed in detail in the first section of this document.

2. Simplified the Section 16 reporting process by allowing registrants to rely on a review of Section 16 reports submitted on EDGAR instead of gathering copies of reports from Section 16 filers. The rule also removed a requirement in Rule 16a-3(e) that mandated Section 16 reporting persons to provide a duplicate copy of their reports to the company. In an EDGAR world, this furnishing of paper copies was clearly redundant. However, in some circumstances a company may need to look beyond reports on the EDGAR system.

The relevant section of old S-K Item 405 read:

(a) Based solely upon a review of Forms 3 and 4 (17 CFR 249.103 and 249.104) and amendments thereto furnished to the registrant under 17 CFR 240.16a-3(e) during its most recent fiscal year and Forms 5 and amendments thereto (17 CFR 249.105) furnished to the registrant with respect to its most recent fiscal year, and any written representation referred to in paragraph (b)(1) of this section.

The new S-K Item 405 now includes this instruction:

(b) Scope of the Inquiry. In determining whether disclosure is required pursuant to paragraph (a) of this section, the registrant may rely only on the following:

(1) A review of Forms 3 and 4 (17 CFR 249.103 and 249.104) and amendments thereto filed electronically with the Commission during the registrant's most recent fiscal year;

(2) A review of Forms 5 (17 CFR 249.105) and amendments thereto filed electronically with the Commission with respect to the registrant's most recent fiscal year; and

(3) Any written representation from the reporting person that no Form 5 is required. The registrant must maintain the representation in its records for two years, making a copy available to the Commission or its staff upon request.

3. Changed the required title of the disclosure from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports”. Also, to help minimize unnecessary disclosure, the new S-K Item 405 encourages that the disclosure not be included in a company’s proxy or Item 12 of Form 10-K when there are no delinquent filers to disclose.

This change was made with the following new instruction:

Instruction 1 to paragraph (a) of Item 405. If no disclosure is required, registrants are encouraged to exclude the caption “Delinquent Section 16(a) Reports.”

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As a bonus to this discussion, and as a response to a question that arises frequently in our workshops, here is the definition of “executive officer”:

240.3b-7 Definition of “executive officer”.

The term executive officer, when used with reference to a registrant, means its president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed executive officers of the registrant if they perform such policy making functions for the registrant

Governance Disclosures

The SEC made one “technical” correction to S-K Item 407 and also added a clarification for emerging growth companies (“EGCs”).

Regulation S-K Item 407(d)(3)(i) used to include this requirement:

The audit committee must state whether:

…

(B) The audit committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T;

The reference to AU Section 380 is out of date as this was a reference to the old PCAOB standard system and not the new PCAOB organization of their auditing standards. This S-K requirement has been updated to read:

(B) The audit committee has discussed with the independent auditors the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the Commission;

The other change in S-K Item 407 is related to EGCs. Because EGCs are not required to provide a Compensation Discussion and Analysis (S-K Item 402), there was some ambiguity about whether or not S-K Item 407(e)(5) applied to EGCs. This is the language in that paragraph:

(5) Under the caption “Compensation Committee Report:”

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(i) The compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) must state whether:

(A) The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) (§229.402(b)) with management; and (B) Based on the review and discussions referred to in paragraph (e)(5)(i)(A) of this Item, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the registrant's annual report on Form 10-K (§249.310 of this chapter), proxy statement on Schedule 14A (§240.14a-101 of this chapter) or information statement on Schedule 14C (§240.14c-101 of this chapter).

(ii) The name of each member of the registrant's compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) must appear below the disclosure required by paragraph (e)(5)(i) of this Item

This ambiguity has been removed by adding this instruction to S-K Item 407(g):

(2) A registrant that qualifies as an “emerging growth company,” as defined in Rule 405 of the Securities Act (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter), is not required to provide the disclosure required by paragraph (e)(5) of this Item.

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Disclosure Modernization and Simplification: Topic #6– Exhibits - Confidential Treatment, Incorporation by Reference and Sundry Other Changes This section reviews the changes made by the SEC’s Disclosure Modernization and Simplification Final Rule to the exhibit requirements, including confidential treatment and incorporation by reference. Changes in these areas are fairly detailed. The changes for confidential treatment were effective for filings made after the date the rule was published in the Federal Register, which was April 2, 2019, and the other changes are effective for filings made after May 2, 2019.

Confidential Treatment Streamlining

Prior to the Disclosure Modernization and Simplification rule, confidential treatment processes were spelled out in Exchange Act Rule 24b-2 and Securities Act Rule 406. These rules contained procedures which required submission of a request to obtain confidential treatment for exhibits filed under the Exchange Act and Securities Act. With a goal of “Substantially reduc(ing) the burden borne by registrants in preparing and responding to confidential treatment requests while still providing all material information to investors,” the SEC replaced the existing procedures with a process for companies to make decisions to redact information without advance SEC approval. To redact information the company must conclude that the information:

(i) is not material and

(ii) would be competitively harmful if publicly disclosed.

If a company chooses to redact information in an exhibit it must:

1. Mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted;

2. Include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed; and

3. Indicate with brackets where the information has been omitted from the filed version of the exhibit.

To make this change the SEC has added this language to S-K 601(b)(10):

(iv) The registrant may redact provisions or terms of exhibits required to be filed by this paragraph (b)(10) if those provisions or terms are both not material and would likely cause competitive harm to the registrant if publicly disclosed. If it does so, the registrant should mark the exhibit index to indicate that portions of the exhibit or exhibits have

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been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. If requested by the Commission or its staff, the registrant must promptly provide an unredacted copy of the exhibit on a supplemental basis. The Commission or its staff also may request the registrant to provide its materiality and competitive harm analyses on a supplemental basis. Upon evaluation of the registrant’s supplemental materials, the Commission or its staff may request the registrant to amend its filing to include in the exhibit any previously redacted information that is not adequately supported by the registrant’s materiality and competitive harm analyses. The registrant may request confidential treatment of the supplemental material submitted under this paragraph (b)(10)(iv) pursuant to Rule 83 (§ 200.83 of this chapter) while it is in the possession of the Commission or its staff. After completing its review of the supplemental information, the Commission or its staff will return or destroy it at the request of the registrant if the registrant complies with the procedures outlined in Rules 418 or 12b-4 (§ 230.418 or § 240.12b-4 of this chapter).

In this Announcement from Corp Fin, the Division provides guidance about the provisions in the March 20, 2019 Disclosure Modernization and Update Final Rule, including discussion of how they will perform compliance reviews (see the bolded text in the preceding paragraph) dealing with how companies use these provision to redact information. Changes for Schedules and Attachments to Exhibits Along the same lines as the changes for redacting information in exhibits discussed in the previous section, the Final Rule also makes changes to the requirements for exhibits that include schedules and attachments. The revised language is in new S-K Item 601(a)(5):

(5) Schedules (or similar attachments) to the exhibits required by this Item are not required to be filed provided that they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the exhibit or the disclosure document. Each exhibit filed must contain a list briefly identifying the contents of all omitted schedules. Registrants need not prepare a separate list of omitted information if such information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. In addition, the registrant must provide a copy of any omitted schedule to the Commission or its staff upon request.

Personally Identifiable Information

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In a change that essentially codifies the Commission’s existing practice, the Final Rule adds a provision that companies may remove personally identifiable information from exhibits without a confidential treatment request. This is in S-K Item 601(a)(6):

(6) The registrant may redact information from exhibits required to be filed by this Item if disclosure of such information would constitute a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses, and similar information).

Hyperlinks for Information Incorporated by Reference In an extension of hyperlinking, the Final Rule includes a provision that if information that is on the EDGAR System (for example a previously filed Form 10-K) is incorporated by reference into another filing, a hyperlink to that information is required. This is accomplished via the following addition to Rule 12b-23:

(d) Hyperlinks. You must include an active hyperlink to information incorporated into a registration statement or report by reference if such information is publicly available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) at the time the registration statement or form is filed. For hyperlinking to exhibits, please refer to Item 601 of Regulation S-K (§ 229.601 of this chapter) or the appropriate form.

This is viewed by the Commission as a part of the FAST Act requirements:

“By requiring an active hyperlink to information on EDGAR if it has been incorporated by reference into a registration statement or prospectus, we believe these amendments will improve the readability and navigability of disclosure documents and discourage repetition, consistent with our FAST Act mandate.”

There are a variety of other non-substantive changes in the exhibit provisions, which you can find in the Final Rule, with page 80 as a starting point. Two Year Look-Back for Material Contracts Another change in S-K Item 601(b)(10) relates to the two-year “look-back” for material contracts. This requirement has been removed for companies other than “newly reporting” companies with this new language:

(10) Material contracts. (i)(A) Every contract not made in the ordinary course of business that is material to the registrant and is to be performed in whole or in part at or after the filing of the registration statement or report. In addition, for newly reporting

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registrants, every contract not made in the ordinary course of business that is material to the registrant and that was entered into not more than two years before the date on which such registrant:

(1) First files a registration statement or report; or

(2) Completes a transaction that had the effect of causing it to cease being a public shell company.

The definition of a “newly reporting company” is fairly detailed and is in the same section of S-K 601(b)(10). Incorporation by Reference As part of the “modernization” provisions of the Final Rule the SEC fixed a pre-EDGAR incorporation by reference issue. In the days before EDGAR, the SEC did not retain paper filings forever, and so some exhibits would have to be re-filed after five years. This is clearly no longer relevant in the EDGAR world. To “modernize” incorporation by reference this paragraph was removed from S-K Item 10:

(d) Incorporation by Reference. Where rules, regulations, or instructions to forms of the Commission permit incorporation by reference, a document may be so incorporated by reference to the specific document and to the prior filing or submission in which such document was physically filed or submitted. Except where a registrant or issuer is expressly required to incorporate a document or documents by reference (or for purposes of Item 1100(c) of Regulation AB (§229.1100(c)) with respect to an asset-backed issuer, as that term is defined in Item 1101 of Regulation AB (§229.1101), reference may not be made to any document which incorporates another document by reference if the pertinent portion of the document containing the information or financial statements to be incorporated by reference includes an incorporation by reference to another document. No document on file with the Commission for more than five years may be incorporated by reference except:

(1) Documents contained in registration statements, which may be incorporated by reference as long as the registrant has a reporting requirement with the Commission; or

(2) Documents that the registrant specifically identifies by physical location by SEC file number reference, provided such materials have not been disposed of by the Commission pursuant to its Records Control Schedule (17 CFR 200.80f).

Cross-Referencing in the Financial Statements

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While for most of us this is not a major issue, the SEC has “formalized” the position that it is not appropriate to incorporate information by reference into the financial statements from other parts of a report or registration statement. The 1934 Act part of this change is this revised paragraph in Rule 12b-23:

(b) Financial information. Except as provided in the Commission’s rules, financial information required to be given in comparative form for two or more fiscal years or periods must not be incorporated by reference unless the information incorporated by reference includes the entire period for which the comparative data is given. In the financial statements, incorporating by reference, or cross-referencing to, information outside of the financial statements is not permitted unless otherwise specifically permitted or required by the Commission’s rules or by U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards as issued by the International Accounting Standards Board, whichever is applicable.

The rational for this change, as explained in the Final Rule, is to reduce confusion about what information is covered by the auditor’s report:

“By generally prohibiting this practice, with certain exceptions as noted above, the amendments address concerns that referencing information outside the audited financial statements to satisfy financial statement disclosure requirements could create confusion about which financial information has been audited or reviewed by the independent auditor.”

There is a wealth of details in these changes, but hopefully none will be that challenging to implement.